Can We Get Round S1030A

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I have a client who owns a personal service company which he no longer needs. The company has £35,000 in the bank. There are no debtors or creditors subject to corporation tax for the year just ended (March) which is expected to be minimal. It seems to me that he could pay himself £10,000 as salary for the year (the previous year it was £8000) which would leave £25,000 to be distributed to him under section 1030A of the Corporation Tax Act 2010 (the replacement for ESC C16) after three months. Does anyone see a problem with this approach?

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You'd want to make sure the personal allowance was used but otherwise why pay £10k salary and incur NIC when you could pay a dividend which would be tax free. The company would need the reserves to do so but if it's got £35k this would suggest that it has.

The £25k received as a quasi capital distribution may qualify for ER but even so this is paying tax at 10% whereas dividends are tax-free up to the higher rate threshhold. So you could distribute more tax-free as a dividend just leaving perhaps £10 covered by the annual exemption to distribute as capital. It all depends on what other income is expected in 2012-13 of course.

Thanks for your advice, Ken. The reason I suggested a salary of £10,000 was because otherwise the company would pay a dividend of more than the £25,000 allowed by section 1030A with the result that the whole amount would be subject to income tax rather than capital gains tax. The sole director intends to strike off the company so he will be subject to the provisions of section 1030A.

It seems to me that a dividend now would be caught by the wording of the section, because the client has told me he intends to close the company, and therefore HMRC would certainly be able to claim that any distribution made now would count towards the £25,000 limit.

IR35 and Taxed IncomeI believe, yet to be confirmed, that the money has not been taxed under IR35, although if it had been then there would be nothing that I can see preventing him just drawing the money as his own.

If you haven't yet applied for striking off there is no question of a dividend being 'caught'. Obviously the client's other income in 2012-13 needs to be taken into account - I said "It all depends on what other income is expected in 2012-13 of course". However, if, for the sake of argument, he didn't have any, what you would do is pay a dividend of £35k (reserves permitting) which would be within the basic rate after PA. The result is tax - zero. Can't do any better than that.

I did suggest salary equivalent to the personal allowance which would be better as it would use the personal allowance but, on reflection, it depends on whether you would get relief for CT. If nothing to relieve against there's not much point but in any case if there is other income that may absorb the PA so you'd pay a dividend to take him up to the higher rate, then pay whatever is left under s.1030A after application for dissolution is made.

We are told that the company is a personal service company, but that does not necessarily mean that IR35 applies. I have assumed it doesn't as that info was not given. I'm simply pointing out the effect of s.1030A, which only applies once you have applied to Companies House under s1003 CTA 2006 as you can see quite clearly from the wording of s.1030A, Up that point a dividend is a dividend. The query was Can We Get Round s.1030A - the answer is you can.

The client has other sources of income which in 2012/13 will use up his personal allowance.

There will be no corporation tax liability.

On my reading of s1030A, subsection 2 states that the section also applies where: "... a companyintends to make, or has made, an application under section 1003 of that Act (striking off on application by company)...". In my client's case he clearly intends to make an application to strike off the company and has told me so in an email.

It occurs to me, however, that the client can change his intention, and decide instead to allow the company to become dormant. He could then draw the available cash as a normal dividend.

... I suppose this illustrates the difficulty of legislating a concession. I take your point but I don't think there is any question of s1030A applying when you don't want it to and I can't see HMRC interpreting it that way. Intentions are of course a subjective matter and introduce a touchy feely aspect which would be best avoided IMHO. I can only think that the words 'intends to' were inserted to deal with the situation where the shareholders take the cash out before the s1003 application has been made. I still don't think there is any question of s1030A being imposed, though of course it has always been possible to trickle the funds out by way of dividend over a period and provided the income remains within the basic rate there is no liability.

I believe, on further reflection, that the intention of the sole director to close the company is not necessarily the same as the intention of the company. It seems to me that we could surely argue that the company does not intend something until it has formally made some move as a company.

It seems we are still awaiting HMRC's formal guidance & views on the application of S1030 however CCH's view is that the simplistic (and to my mind sensible) approach is that, if a company has ceased trading, any distribution will be a "relevant distribution" ie it will be "in anticipation" of the final winding up.